Top investors spread across different areas (Image: Me 3645 Studio via Getty Images)
These are the little-known alternative investments that wealthy people get involved in, an expert has revealed. Wealthy investors rarely rely exclusively on shares to grow their money.
Many also hold “alternative investments”, assets ranging from gold and commodities to infrastructure and hedge funds, which are intended to behave differently when traditional markets come under pressure. Paul Denley, CEO and co-founder at London-based Oakham Wealth Management, said alternatives could make a portfolio more resilient, but warned that they were not guaranteed to rise when other investments fell.
He said: “Equities are normally the growth engine of a portfolio, while bonds provide stability and income. The problem is that the relationship does not always work as expected. In 2022, shares and bonds fell together, leaving investors with fewer places to hide.
“The purpose of an alternative investment is to provide a return that does not depend on exactly the same economic forces. The test is whether it can hold up, or at least fall less, when the rest of the portfolio is struggling.”
Paul Denley (Image: Newspage)
Types of alternative investment
One of the best-known alternatives is gold. Unlike a bond, it is not issued by a government or company and therefore carries no credit or counterparty risk when owned directly. Its long-term correlation with both shares and bonds has also been close to zero, meaning its price has not historically moved consistently in the same direction.
Mr Denley said: “Gold tends to do its best work during crises, currency stress and periods when confidence in governments or central banks weakens. It was broadly flat in 2022 (in US dollars), while bonds suffered their worst year in decades.
“You do not necessarily need a huge holding. A mid-single-digit percentage to low double digit of a portfolio can capture much of the diversification benefit without making gold the centre of the investment strategy.”
Broad commodities, including energy, industrial metals and agricultural products, can provide another form of protection. Their prices are often part of the inflation that damages the value of shares and bonds, which means they may perform strongly when the cost of living surges.
But commodities can be extremely volatile and do not produce dividends or interest. Mr Denley said they could therefore be regarded as offering some protection against persistent inflation rather than a permanent engine of growth.
Different benefits
Infrastructure and other real assets offer a different potential benefit. Utilities, renewable-energy projects, toll roads and essential networks can generate income linked contractually or through regulation to inflation.
Mr Denley said: “These are long-lived assets providing services people continue to use throughout the economic cycle. Their income can rise with prices in a way that conventional bond payments generally cannot.
“But investors need to recognise that listed infrastructure is still traded on stock markets. It can fall alongside equities during a sell-off, so the diversification is meaningful but not complete.”
Strategies used by wealthy investors
Wealthier investors may also use market-neutral or multi-strategy hedge funds, which seek to generate returns through manager skill rather than relying on markets rising. The best have navigated major downturns, including 2008 and 2022, but performance varies enormously. Charges can be high, strategies may be difficult to understand and investments that appear uncorrelated in normal conditions can suddenly fall together during a crisis.
Mr Denley said: “There is no alternative investment that works in every environment. In a severe bear market almost everything can fall, with cash and perhaps gold among the few exceptions.
“Alternatives should support the core portfolio, not replace it. Gold can help during monetary stress, commodities can protect against inflation, infrastructure can provide real income and carefully selected absolute-return managers can offer something tied to neither shares nor bonds.
“Each protects against a different risk. That is why the combination matters more than allocating heavily toward any single alternative.”
